Estonia, How A Former Soviet State Became The Next Silicon Valley

TALLINN - It’s 4 p.m., and night is already falling on Tallinn. The wind is freezing. Covered in snow, the old Soviet military barracks located on the outskirts of Estonia’s capital city look like the set of a Cold War movie.

Uniformed soldiers occasionally cross the courtyard. You almost expect James Bond to suddenly come around the corner of one of the three buildings on the site that in 2008 became the headquarters of the NATO Cooperative Cyber Defense Centre of Excellence.

The flags of the 11 members flutter in the central court. Behind the thick walls of the barracks, experts simulate cyber-attack scenarios and ways of fighting back. The existence of the center and its location in Estonia bears witness to the new status of the little Baltic state on the outer rim of Europe. Since it was the victim of major data pirating in 2007, ostensibly orchestrated by its big neighbor Russia, the country has built state-of-the-art expertise in computer security.

In addition to cyber defense, Estonia, which is the birthplace of Skype, is one of most connected countries in the world. You only need to stroll through the streets of Tallinn to take stock of this – Wi-Fi has been available everywhere – free – for a decade. Third generation (3G) Wi-Fi is available throughout the country, in the cities as well as in the rural areas. A third of the country is already covered by 4G. In Tallinn, it’s not unusual to see people pay for their parking space with their smart phone.

By 2015, the former USSR satellite state will be in a position to provide 100mb/second connections to the entire population. The EU objective is to attain this by 2020 when it is expected that no more than about half the total population of the member countries will be using it. Yet in Estonia, “Internet access is considered as a basic right, like access to water and electricity,” says Indrek Vinberg, the young director of the new technologies demonstration center in Tallinn.

The richness of its technological infrastructure has made Estonia a pioneer in terms of e-government. Introduced in 2000, electronic tax filing has become the norm. “Ninety-four percent of Estonians file online,” says Minister of the Economy and Telecommunications Juhan Parts, adding that this has made paying taxes “almost fun.”

The country has been using electronic ID cards since 2002, and this is the real keystone of the system. The card makes it possible to access various public services on the web (social security, police, education, etc.) with the guarantee that the different government portals and their data are safe and protected. Tallinn’s residents can also use the card as a transportation card. It is also a voter registration card for those opting to vote via Internet, which 24% of citizens did during the 2011 legislative elections.

Teaching coding from primary school

It is not surprising in this context that the new EU Agency for Large-Scale Information Systems, charged with managing the second generation Schengen Information System and supporting management of European immigration policies, has officially been headquartered in Tallinn since Dec. 2012, while maintaining a base of operations in Strasbourg. This is a real source of pride for Estonia, which has been a EU member since 2004 and converted to the euro last year.

“The importance given to e-government was a decisive factor in the decision to set up here,” acknowledges Krum Garkov, the Bulgarian executive director of the agency.

The resolutely high-tech profile of the little Baltic state is part of its heritage as a former Soviet bloc country. After the USSR imploded, Estonia – who had hardly ever been independent – had to rebuild itself from scratch. And this was a real opportunity say the country’s leaders.

“Being such a small country, after the Soviets left there were too few people to administer it effectively,” recalls Estonian President Toomas-Hendrik Ilves, who has a master’s degree in psychology from the University of Pennsylvania. “So we opted to make up for the lack of human resources through automatization.”

As the country’s leaders in the early 1990s tended to be young and high-tech aware, they decided to invest massively in new technologies, a public sector initiative that was rapidly imitated by the private sector. Banks and telecom operators also invested in building new technology infrastructure. “Being a ward of the Soviet Union for several decades made it possible for us to train a competent generation of engineers and mathematicians, which turned out to be very useful after independence,” says Minister of the Economy and Telecommunications Juhan Parts.

The government introduced computer and new technologies training in schools, starting in primary school, to better prepare Estonians for the new economy. In 1996, the Ministry of Education launched the Tiger Leap foundation to equip every school in the country with computers and get them connected to the Internet – a mission that was accomplished just a few years later. Today, the foundation promotes computer-programming training. At the Gustav Adolf School in Tallinn, for instance, children from six through high school age learn programming basics, which are taught as games.

“The training is crucial for this generation, who often know how to use a computer before they learn to read,” says Valdur Parasin, a French teacher at this school that counts the inventors of Skype among its former students.

“The training helps children with their math and logic as well,” adds Kristi Rahn, a computer science teacher. The private sector also plays a role in the education of young Estonians. After creating partnerships with companies like IBM and Microsoft, the Tiger Leap foundation is turning to the increasing numbers of Estonian high tech companies. The objective is for these companies to come to the schools to explain what they do to, awaken interest in a career in new technologies, and attract future talent.

You don’t need to go very far to find a good model. The success of Skype, sold to eBay in 2004 and then to Microsoft in 2012, has inspired a whole generation of students and young web entrepreneurs. Grabcad, which specializes in 3D printing, is one of the latest Estonian success stories. “The start-up ecosystem is booming in Tallinn,” says Enn Saar, who works for telecom firm Elion. “It’s great for the country. In the early 2000s, companies were afraid of a brain drain, of young high tech talent leaving for abroad. Today we’re seeing the opposite: Estonians wanting to develop their business here.” The country is drawing foreigners as well. The Swedish bank Swedbank recently set up a division charged with managing IT in the whole Baltic region.

Recruitment isn't easy

Several IT hubs have been created these past few years in the Estonian capital. Here too the Soviet past turned out to be a source of new opportunities. Many start-ups have elected to set up in the Ulemiste district, where during the Cold War the Dvigatel factory employed around 10,000 workers to make parts and munitions for the Red Army. The buildings, looking just as sinister as they did back then, are still standing – only now all you hear is the click-click of hundreds of blue-jean clad developers and webmasters typing on their keyboards.

The government is aware of the formidable potential of this new economy. In 2010, it created a cluster to help export Estonian know-how in new technologies and to expand the sector, which accounts for about 15% of GDP. In 12 years, research and development investment has gone from 0.9% to 2.3% – something that will help get the country’s economy back on track – it is expected to show growth of a little over 3% in 2013 after having plunged by 15% in 2009 during the crisis.

The main challenge for this country – with its population of almost 1.3 million – is to keep growing. Yet despite all the efforts in education and training, companies have a hard time finding the personnel they need to develop. Skype, which employs more than 500 people in Tallinn, finds it difficult to grow its local teams.

“It’s one of the limitations of our model,” notes Enn Saar. ”You couldn’t, say, hire 3,000 software developers in a year here.”

And this, says one computer industry representative, may be the limits of the place. “Estonia is a fantastic place to nurture ideas. Unfortunately, it remains difficult to grow a company and move to the next level.”

The small Baltic nation was caught between Soviet and Nazi ambitions, and Estonian members of SS units are remembered by some for staving off the Red Army. But others can't forget that some 1,000 Estonian Jews, 250 Roma and 7,000 Christians were

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